RIYADH - Global Islamic banking assets are forecast to cross $1.8 trillion in 2013 up from $1.3 trillion in 2011, Ernst & Young said in its World Islamic Banking Competitiveness Report 2013.

It noted that the Islamic banking industry continues to record robust growth, with the top 20 Islamic banks registering a growth of 16 percent in the last three years.

The report said the Islamic banking industry in Saudi Arabia - with an estimated $207 billion of Islamic assets - was ranked first in 2011 followed by Malaysia with total assets of $106 billion and UAE third with total assets of $75 billion.

With the majority of the Muslim community being unbanked together with the need to attract foreign investment from Gulf Cooperation Council (GCC), the market appetite for these products continues to grow, said Merisha Kassie, Director of Financial Services at Ernst & Young.

This form of banking is also growing in new markets such as Indonesia, Egypt, Iraq and Libya and South Africa has made significant strides in the inclusion of Islamic finance into its tax legislation with the relevant amendments expected to be effective from 2013.

Across Africa, the need for government Islamic bond (sukuk) has become more pronounced as in some instances banks are required to hold a certain percentage of interest bearing instruments, the report said.

The strong global market growth forecast as outlined in the report, and the surge of activity in Africa with respect to the proposed issuance of sovereign sukuk in South Africa and other African countries support the growing momentum of Islamic banking in Africa.

Despite the projected asset growth and the introduction of new Islamic initiatives in a number of countries, the report noted that profitability continues to lag behind but with the implementation of transformation agendas over the next two to three years, Islamic banks will close the performance gap that currently exists with the overall banking industry.

The report noted though that successful transformation could see the profit pool of Islamic banks rise by an additional 25 percent by 2015.

However, the report anticipated also some challenges in the industry. The obvious challenge remains around ensuring that a proper regulatory framework exists to facilitate both sovereign sukuk and corporate sukuk, it said.

"The market currently has great interest in the sovereign sukuk. Sukuk are seen to be attractive as a result of the foreign direct investment (FDI) that it would attract particularly from the Middle East where investors will seek Shariah-compliant instruments," said Emilio Pera, Financial Services Leader at Ernst & Young.